Finding funding for a start up or early stage business is extremely challenging. You need to crystal clear on what the funds will be use for, how, when and how your funder or investor will earn their return. Tune in to this podcast of The Money Show as Pavlo Phitidis digs deeper into what you need to consider before you apply for start up funding.
Why do you need funding?
You should be seeking funding to solve a problem. You need to understand clearly who your customer is and what problem you’re going to solve for them. And through this deep understanding of the problem, and the value you can bring by solving it, you can excite a funder to listen further.
The questions that will flow once you’ve gained their enthusiasm will be around the following:
Timing – Timing is crucial when it comes to starting a business. Legislation and affordability can play a role in determining the best time to launch a business, and funding is necessary to take advantage of the right opportunities at the right time.
Legislation – New laws and regulations can open up new opportunities for businesses. Funding is necessary to stay ahead of these changes and take advantage of them.
Affordability – The cost of goods and services can fluctuate, and funding is necessary to take advantage of lower costs when they are available.
Also be clear on what you will use the funding for. It can be used for a variety of purposes, such as purchasing equipment, inventory, and real estate, or for hiring staff.
- New/Used – Funding can be used to purchase new or used equipment, inventory, and real estate, depending on the needs of the business.
- Secured/Unsecured – Funding can be secured or unsecured depending on the lender and the needs of the business.
- Offices – Funding can be used to rent or purchase office space, depending on the needs of the business.
- Applied when – Funding can be used at different stages of a business, such as during the launch phase or for expansion.
- Milestones – Funding can be used to reach specific milestones, such as the launch of a new product or service.
- Burn but earn your stripes – funding can be used to sustain the business through the early stages, but it’s important to have a plan to eventually earn a profit and pay back the funding.
- Applied if – Funding can be used for a variety of contingencies, such as unexpected expenses or changes in the market.
- Rent – Funding can be used to cover rent or mortgage payments for the business.
- Alternatives – Funding can be used as a backup plan in case other sources of funding fall through.
- Collaborate – Funding can be used to collaborate with other businesses or organizations to achieve common goals.
In this podcast of The Money Show Pavlo Phitidis digs deeper into what you need to consider before you apply for start up funding.
What are the different kinds of funding?
Equity funding involves selling a portion of the business in exchange for funding. This can be beneficial for businesses that have a high growth potential.
Debt funding involves borrowing money that must be paid back with interest. This can be beneficial for businesses with a steady cash flow.
A mix of different types of funding, such as debt and equity, can be beneficial for a new business. This can help to balance the risk and reward of the venture.
As a start-up you cannot turn to a bank, nor should you because you don’t want to raise debt that you need to start paying back the next month.
You want to secure funding that allows you to spend, to invest in the business before you have to start paying it back.
What are the sources of funding
Private Individuals – Private individuals, such as friends and family, can be a source of funding for a new business. They will be very interested in you – your skills, experience knowledge, values and will usually be familiar to you.
Suppliers – Suppliers may be willing to provide funding in exchange for a long-term contract.
Customers – Customers may be willing to provide funding in exchange for a stake in the business or early access to products or services.
Employees – Employees may be willing to provide funding in exchange for a stake in the business or a share of the profits.
Government – Government agencies may provide funding for businesses in certain industries or for businesses that meet certain criteria.
Corporates – Corporations may provide funding in the form of grants or investments. In south Africa it tends to be available to 51% or more black owned business as part of their BBBEE requirements, and the dispensation of these funds is highly structured.
Self and Smarts – Funding can be generated by using personal savings, credit cards, and other personal resources.
Banks – Banks may provide funding in the form of loans or lines of credit.
Venture Capital – Venture capital firms may provide funding for businesses with a high growth potential. VC is not huge in South Africa, certainly not in start-ups. Venture Capital tends to favour established successful businesses with new ideas or developments.
So, how can you succeed in securing funding from one or more of these funders?
- Know how – Having knowledge about the industry, the market, and the problem being solved is crucial to the success of a new business.
- Skills – Having the necessary skills to operate and manage a business is important for success.
- Relationships – Building relationships with suppliers, customers, and industry leaders can be vital to the success of a new business or the expansion of a growing business.
- Experience – Having experience in the industry and in running a business can be a major advantage as funders will see that you know what it takes.
- Skin in the game – Investing your own money and resources into a new business can show investors and lenders that you are committed to the success of the venture.
Think like a funder and ask “What will I get in return?”
The return on investment for a new business can vary greatly depending on the success of the venture. Investing in a new business always carries a certain level of risk. It’s important to carefully consider the potential returns and risks before making a decision to invest. Help to paint that picture for the potential funder.